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Is Market-driven Oil Pricing Mechanism the Holy Grail?
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Is a more market-oriented oil pricing mechanism the Holy Grail to eliminate refiners' deficits and fuel further economic growth? Probably not.


The National Development and Reform Commission (NDRC) recently said that a more flexible oil pricing system has "stealthily" taken effect, designed to better tune local oil product prices to reflect the international one.


In reality, however, the authority still finds it hard to balance the interests of all parties using the new mechanism.


Why? The reason is self-evident: the new system is still subject to official mandates and artificial adjustments.


The NDRC has been reported to be seriously thinking of removing the price peg between local and international oil products and instead linking local prices to global crude oil prices.


The top economic planner had never officially confirmed the news until it was made clear this week that domestic oil products have long been priced on the average international crude oil price, plus costs and adequate profits for refineries.


It is true that the new mechanism is a more accurate and efficient means of reflecting global oil supply and demand. Chinese refiners' deficits arising from high crude imports and low prices on local oil products can probably be reduced if the new system is implemented.


However, people cannot help asking how the authority can objectively determine the "cost and adequate profit of refineries".


Costs for different refiners located in different regions may vary substantially. Moreover, what would be a reasonable profit margin for both oil refiners and consumers to accept is a hard nut for the NDRC to crack.


Sinopec confirmed that the authority raised the local refined oil price twice last year using the new pricing system to relieve Sinopec's refining deficits. But the top Asian refiner still had to depend on 5 billion yuan in compensation from the State to cover its refining deficit.


A fully market-set oil pricing mechanism will not and should not be available in China in the foreseeable future, based on the fact that the oil product wholesale business is still State-controlled and dominated by a few State-owned giants.


(China Daily February 1, 2007)


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